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Pullback extends, falls back towards 163.00

  • GBP/JPY has extended after last Friday’s losses and is back trading near two-week lows in the 163.00 area.
  • Risk aversion flows and an associated drop in UK bond yields were the main factor driving the decline on Monday.
  • The cross is now trading more than 3.0% below last week’s high above 168.00.

The crossing GBP/JPY lost 1.1%, after extending last Friday’s losses to drop close to the 163.00 level for the first time in almost two weeks, and in doing so, fell below its 21-day moving average (currently at 163.18) for the first time since mid-March. The latest move has been driven by a combination of risk-off flows hurting the risk-sensitive sterling and benefiting the safe-haven yen and lower UK bond yields, reducing the upside of the UK rate over Japan, thus improving the relative investment attractiveness of the yen against the pound sterling.

At current levels of 162.80, the pair is now trading more than 3.0% below last week’s multi-year highs above the 168.50 mark. According to technicians, the latest drop below the 21-day moving average opens the door for a pullback to the 50-day moving average and key support in the form of early 2022 and late 2021 highs near 158.00, a additional 3.0% drop from current levels.

The main fundamental catalyst behind the risk-off start to the week that has weighed heavily on the GBP/JPY pair is the negative Covid-19 news coming out of China, a story that will be a key confidence driver in the coming weeks. . Should more cities go into a Shanghai-style lockdown, global growth forecasts will be further challenged and this could easily lead to a further drop in the GBP/JPY pair.

In addition to China lockdown risks, GBP/JPY traders will also be keeping an eye on this week’s BoJ meeting, with the bank expected to reiterate its ultra dovish stance. That could mean some downside risks for the yen. In terms of UK data and domestic issues, there is not much to write home about. Discontent over the UK Prime Minister’s so-called “partygate” scandal continues to mount, but it does not yet seem likely to jeopardize his job.

Technical levels

Source: Fx Street

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